Scarcity and the Factors of Production What is economics? How do economists define scarcity? What are the three factors of production?
What Is Economics? Economics is the study of how people make choices to satisfy their wants For example: You must choose how to spend your time Businesses must choose how many people to hire
Scarcity and Shortages Scarcity occurs when there are limited quantities of resources to meet unlimited needs or desires Shortages occur when producers will not or cannot offer goods or services at current prices
The Factors of Production Land All natural resources that are used to produce goods and services. Labor Any effort a person devotes to a task for which that person is paid. Capital Any human-made resource that is used to create other goods and services.
The Factors of Popcorn Production Land Popping Corn Labor The human effort needed to pop the corn Capital Corn-Popping Device Vegetable Oil
Opportunity Cost Does every decision you make involve trade-offs? How can a decision-making grid help you identify the opportunity cost of a decision? How will thinking at the margin affect decisions you make?
Trade-offs and Opportunity Cost Trade-offs are all the alternatives that we give up whenever we choose one course of action over others. The most desirable alternative given up as a result of a decision is known as opportunity cost. All individuals and groups of people make decisions that involve trade-offs.
The Decision-Making Grid Economists encourage us to consider the benefits and costs of our decisions. Karen s Decision-making Grid Alternatives Benefits Sleep late Enjoy more sleep Have more energy during the day Wake up early to study Better grade on test Teacher and parental approval Personal satisfaction Decision Sleep late Wake up early to study for test Opportunity cost Extra study time Extra sleep time Benefits forgone Better grade on test Teacher and parental approval Personal satisfaction Enjoy more sleep Have more energy during the day
Thinking at the Margin When you decide how much more or less to do, you are thinking at the margin. Options 1st hour of extra study time 2nd hour of extra study time 3rd hour of extra study time Benefit Grade of C on test Grade of B on test Grade of B+ on test Opportunity Cost 1 hour of sleep 2 hours of sleep 3 hours of sleep
Production Possibilities Graphs What is a production possibilities graph? How do production possibilities graphs show efficiency, growth, and cost? Why are production possibilities frontiers curved lines?
Production Possibilities A production possibilities graph shows alternative ways that an economy can use its resources. The production possibilities frontier is the line that shows the maximum possible output for that economy. Production Possibilities Graph Watermelons (millions of tons) 0 Shoes (millions of pairs) 15 8 14 14 18 20 21 12 9 5 0 Shoes (millions of pairs) 25 20 15 10 5 a (0,15) b (8,14) A production possibilities frontier c (14,12) d (18,9) e (20,5) f (21,0) 0 5 10 15 20 25 Watermelons (millions of tons)
Efficiency Efficiency means using resources in such a way as to maximize the production of goods and services. An economy producing output levels on the production possibilities frontier is operating efficiently. Production Possibilities Graph Shoes (millions of pairs) 25 20 15 10 5 S a (0,15) b (8,14) g (5,8) A point of underutilization c (14,12) d (18,9) e (20,5) f (21,0) 0 5 10 15 20 25 Watermelons (millions of tons)
Growth Growth If more resources become available, or if technology improves, an economy can increase its level of output and grow. When this happens, the entire production possibilities curve shifts to the right. Production Possibilities Graph Shoes (millions of pairs) 25 20 15 10 5 T S a (0,15) b (8,14) c (14,12) Future production Possibilities frontier d (18,9) e (20,5) f (21,0) 0 5 10 15 20 25 Watermelons (millions of tons)
Cost Cost A production possibilities graph shows the cost of producing more of one item. To move from point c to point d on this graph has a cost of 3 million pairs of shoes. Production Possibilities Graph Watermelons (millions of tons) Shoes (millions of pairs) 0 15 8 14 14 18 20 12 9 5 Shoes (millions of pairs) 25 20 15 10 5 c (14,12) d (18,9) 21 0 0 5 10 15 20 25 Watermelons (millions of tons)